Santos narrows guidance as LNG sales double in third quarter

Santos has opted to hedge oil production, as solid Q3 output allowed it to lift the lower end of its guidance range.

The first cargo from Gladstone’s liquefied natural gas project in Queensland is loaded aboard the Seri Bakti. (Picture supplied by Santos)

Energy group Santos has hedged oil production to guard against oil price falls after logging a solid third quarter production that allowed it to raise the bottom of its guidance range and cut cost guidance.

The hedging will protect the company against falls below $US50 a barrel but will also cap gains if oil prices shoot higher than $US62.

For the three months to September 30, the Adelaide oil and gas company (STO) logged a 31 per cent jump in sales volumes to 21.3 million barrels of oil equivalent (mmboe), while production advanced 7 per cent to 15.5 mmboe.

Revenue rose 10 per cent from the previous quartrer to $US650m.

UBS had been expecting sales of 21.6 million barrels, production of 16 million barrels and revenue of $US665m.

Santos has hedged 7.3 million barrels of oil production next year. It will receive $US50 a barrel if oil trades between $US40 and $US50 and the Brent price plus $US10 if oil falls below $US40.

But if oil rises above $US62, Santos will receive that price.

“We are taking the right steps to ensure Santos becomes a strong and sustainable business, and that mindset guides our decision making as we continue to reduce costs and maintain a strong capital discipline,” managing director Kevin Gallagher said.

“Furthermore, our decision to commence oil price hedging reflects our desire to reduce the effect of commodity price volatility,”

RBC analyst James Strong said it was a solid quarterly report and that the market should support the hedging move.

“Some will be in the “too little too late” camp... however, most will see the hedging move as more signs of capital stewardship by new MD Gallagher,” Mr Strong said.

A ramp-up of the group’s flagship GLNG project in Queensland helped LNG sales volumes more than double to 755,500 tonnes, with GLNG producing 1.3 million tonnes of LNG in the quarter and shipping 21 cargoes.

The positive readings allowed Santos to narrow its guidance for calendar 2016, with production expectations now pegged at 60-62 mmboe as against an earlier projection for 57-63 mmboe.

Sales volumes are anticipated to hit 81-83 mmboe for the full year, at the upper end of earlier projections for 76-83 mmboe, while capital expenditure forecasts have been trimmed by $US50m to $US700m.

The company also tweaked the range of expected upstream production costs from $US9-$US10 a barrel to $US9-$US9.50.

Capital expenditure guidance has been cut from $US750m to $US700m.